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Starting a business is no easy task. It takes a lot of hard work, dedication, and planning. One of the most important aspects of starting a business is securing the funding to get your venture off the ground.
Without proper financing, your business will likely fail. It is more important than ever for companies to have a well-thought-out financial strategy in today’s competitive economic climate.
What is Financial Strategy?
A financial strategy is a plan that outlines how a business will obtain and manage its finances. It includes things like how the company will generate revenue, allocate its funds, and what methods it will use to repay any loans or debt.
How to Learn Financial Management?
There are a few different ways to learn financial management:
- Attend workshops or classes offered by your local Small Business Development Center (SBDC) or SCORE chapter.
- Read books and articles on the topic. The library is an excellent resource for this!
- Watch online tutorials. There are many free resources available online.
- Consult with an accountant or financial planner. These professionals can help you create a customized plan for your business.
If you are interested in securing a position as a financial manager in the future, there are Three Ways To Boost Your Career with an MBA in Accounting Degree, which you must look up for better insights.
Who Constitutes a Financial Strategy?
A financial strategy is essential for businesses of all sizes, but it is especially crucial for small businesses. A small business may not have the same resources as a larger company, so it needs to be more diligent in planning its finances.
There are three leading players involved in any financial strategy: the entrepreneur, investors, and banks.
Each group has different priorities and goals, so the entrepreneur must understand their role and expectations from each party.
The Role of the Entrepreneur
As an entrepreneur, your primary goal should be to create a profitable business. You also need to be responsible for assembling the right team of advisors and creating a financial strategy that meets the needs of your investors and bankers.
The Role of the Investor
Investors are on the lookout for enterprises that are highly likely to return their investment. They also want to see a well-thought-out business plan that outlines how the company plans to achieve profitability.
The Role of the Banker
Banks are interested in businesses that can repay their loan plus interest. Most banks require detailed financial statements to qualify for a loan, including income statements and balance sheets.
The banker will also want to see a detailed business plan that shows how the company plans to repay the loan.
Why Do Businesses Need a Financial Strategy?
There are some reasons why businesses need a financial plan:
To Secure Funding: One of the most important reasons for having a financial strategy is securing funding from investors or lenders.
A well-crafted plan shows potential investors that you’re serious about your business and gives them confidence in your ability to succeed.
To Manage Cash Flow: A financial strategy can help businesses better manage their cash flow, which is essential for staying afloat in the early stages of a company.
To Make Informed Decisions: Good financial planning allows businesses to make informed decisions about pricing, inventory, and hiring.
To Avoid Financial Problems: Without a financial strategy, businesses are more likely to experience financial problems such as cash flow shortages or bankruptcy.
Financing Options:
There are several different options for businesses to raise money. To make the best decision for your business, it is essential to understand the options available:
SBA Loans: The Small Business Administration (SBA) offers loans to small businesses that might not otherwise qualify for a loan. The SBA does not issue loans directly but partners with banks and other lending institutions to provide financing.
Term Loans: It is repaid over a set period, typically three to five years. Term loans are available from traditional lenders like banks, credit unions, and online lenders.
Line of Credit: A line of credit is a type of loan that allows businesses to borrow money up to a specific limit whenever they need it. It can be helpful if your business experiences fluctuations in cash flow or needs to make a large purchase.
Invoice Financing: Invoice financing allows businesses to sell their unpaid invoices to a lender to get an immediate cash infusion. This type of financing can be helpful for companies that have a lot of outstanding invoices and need money quickly.
Angel Investors: Angel investors are individuals who invest their own money in early-stage startups in exchange for ownership equity. These can help get your business off the ground, but before approaching, you should research them thoroughly.
The Do’s and Dont’s of Small Business Financing
There are many things to consider when it comes to small business financing. Here are some practical pointers to keep you on track:
Do:
Have a Detailed Business Plan: This is essential when seeking funding from any source. Investors and lenders will want to know how you plan to use their money and your expected return on investment (ROI).
Research Your Options: Don’t just go with the first option that comes your way. Compare interest rates, terms, and eligibility requirements before making a decision.
Seek Advice: Experienced investors can share with you their stories of collecting funds for their businesses and offer advice on what to avoid.
Continue Networking: Right people can help your business in more ways than one. Attend industry events and get to know people in the field – you never know who may have the perfect connection or opportunity for you.
Make a Budget: Keep your business and personal finances separate. It helps in staying organized and on track with your objectives.
Maintain a Good Credit Score: A high credit score will make it easier for you to borrow money when needed and keep your interest rates low.
Don’t:
Jump Into a Loan You Can’t Repay: This is probably the worst thing you can do for your business and will likely lead to bankruptcy.
Ignore Financial Planning: It’s essential to have a financial plan to know where your business is headed and what steps need to be taken to reach your goals.
Rest on Your Laurels: Just because you’ve been approved for a loan or received an investment doesn’t mean you’re home-free.
Don’t Fudge the Numbers: Lenders and investors will want to see accurate financial information, so make sure your books are in order.
Forget About Debt: While it’s essential to avoid too much debt, using debt as leverage can be a smart move for small businesses.
The Takeaway:
Small businesses need money to grow and thrive – no matter how well you plan, there will be times when you’ll need to turn to outside sources for financing.
By understanding the options available and planning, you can ensure your business has the resources to succeed.
You may also like: 4 Things To Know About Start-Up Funding Stages
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